How The Strengthening US Dollar Could Spell Trouble For The Global Economy

The US Dollar has seen a near-continuous rise since May 2021, growing from 0.82 to almost 1 against the Euro, 0.71 to 0.84 against the Pound Sterling, and 108 to 137 against the Yen.

- Pitamber Kaushik

As the primary reserve currency for international trade, the US Dollar holds significant sway over the global monetary system. Central banks around the world hold huge reserves of it and so do many non-US entities, companies, and individuals. It is overwhelmingly the currency of choice in most international transactions. It is also the standard currency in most global commodity markets. Many small countries also use the US Dollar as their official currency while the currencies of several oil-producing nations like Saudi Arabia and Qatar, among others, are pegged to it. Thus, sharp rises and falls in its value translate to economic consequences worldwide.

As the US Dollar surges, items which are traded predominantly in US Dollar get more expensive in local currencies. In order to get, say USD 1000-worth of a certain metal (which is traded internationally in USD), one would have to pay a significantly higher number of pounds in the UK compared to the previous year. If the price of that commodity has itself grown over the past year, that would only compound to its effective expensiveness. Since petrol, a major energy source, and raw materials such as metals and timber, the main input factors for most production processes, are predominantly transacted in US Dollar in international markets, surges in their values feed into almost all economic activities. This results in rampant inflation all over the world. On the other hand, the US itself enjoys the exceptional privilege of benefitting from this phenomenon, as it becomes easier for it to import with a stronger dollar, thus enabling it to moderate inflation.